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ESTATE TAX BLOG

Freedom From Religion Foundation, Inc. (F) and its two co-presidents brought suit against the Secretary of Treasury and the Commissioner of the IRS, contending that IRC §107(2), which excludes certain rental allowances paid as part of the salary of “ministers of the gospel,” violates the establishment clause of the First Amendment (and the equal protection clause of the Fifth Amendment, but this argument was not addressed by the court). F is an organization founded to promote the “constitutional principle of separation of church and state and to educate the public on matters related to non-theistic beliefs.” F, itself, is not a church or a religious organization operating under the authority of a church. Further, the co-presidents' roles do not constitute an ordination, commissioning, or licensing as ministers. Neither of the co-presidents sought to utilize the exclusion from gross income provided by IRC §107(2).

The District Court for the Western District of Wisconsin held that the income tax exemption under IRC §107(2) for a rental allowance paid to a minister as part of his or her compensation violates the First Amendment's establishment clause. The court stated that Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989), was controlling. In Texas Monthly, the Supreme Court found that a sales tax exemption for religious publications violated the establishment clause because it provided “preferential support for the communication of religious messages.” Treasury and the IRS made “little effort to distinguish Texas Monthly.” They merely referenced the plurality's statement in that case that preferential treatment may be permissible if it remedies “a significant state-imposed deterrent to the free exercise of religion.” Further, the defendants did not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses. Regardless, the court noted that the Supreme Court has rejected the view that the mere payment of a generally applicable tax may qualify as a substantial burden on free exercise.

Also, the court distinguished IRC §107(1), which excludes from gross income the rental value of a home provided to a minister as part of his/her compensation. The court reasoned that IRC §107(1) provides the same benefit to ministers who meet certain criteria that IRC §119 provides to secular employees who meet certain housing criteria. IRC section 107(2), however, creates an imbalance even with respect to those ministers who benefit from IRC §107(1) because ministers who get an exemption under IRC §107(2) can use their housing allowance to purchase a home that will appreciate in value and still can deduct interest they pay on their mortgage and property taxes, resulting in a greater benefit than that received under IRC § 107(1). Additionally, the court stated, “Congress did not incorporate an exemption for secular employees into IRC §107(2) or expand IRC §119 to accomplish a similar result.” The court noted that assisting “disadvantaged churches and ministers is not a secular purpose and it does not produce a secular effect when similarly disadvantaged secular organizations and employees are excluded from the benefit.” Thus, the court found that IRC §107(2) violated the establishment clause of the First Amendment and enjoined Treasury and the IRS from enforcing IRC §107(2) until the later of the conclusion of any appeals or the deadline for Treasury and the IRS to file an appeal.

Click here for the full text of Freedom From Religion Found., Inc. v. Lew.

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